The Fibonacci sequence was well known in ancient India, where it was used in poetry. But it got its name thanks to the 12th century European mathematician Leonardo of Pisa, better known by his pseudonym Fibonacci. In the 13th century, Leonardo Fibonacci, a famous Italian mathematician, discovered the simple sequence of numbers 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.
1+1=2
2+1=3
3+2=5
5+8=13
and so on.
This series has many remarkable mathematical features, but the main thing is that the ratio of a member of the series to the previous one tends to the famous “Golden Ratio” - the number 1.618. This number has been known since ancient times and was first found in Euclid’s Elements (about 300 BC), where it was used to construct a regular pentagon.
The golden ratio is considered the most harmonious proportion of the relationship of the whole to the part. Magically, the number 1.618 is very often found in natural forms that have nothing directly to do with each other. This proportion can be seen in snail shells, the distance between leaves on a branch, the shape of galaxy spirals, and even in the average ratio of human body parts.
The Belarusian scientist Eduard Soroko, who studied the forms of golden sections in nature, noted that everything growing and striving to take its place in space is endowed with the proportions of the golden section. In his opinion, one of the most interesting forms is the spiral twist.
Correction levels:
0.382 (38.2%)
0.5 (50.0%)
0.618 (61.8%)
Intermediate levels:
0.236
0.764
Expansion levels:
1 (100%)
1.382 (138.2%)
1.618 (161.8%)
Using Fibonacci levels is not difficult, to do this you need to take an obvious trend, 2 points: the maximum price and the minimum, after which you will stretch the grid.
Correction levels based on Fibonacci theory
Uptrend:
From the uptrend chart we see a correction in the bullish movement. By stretching the Fibo grid, we can use them and go long, making a profit on pullbacks from the levels, or if we are confident in further upward movement, use them to build up a position and the ability to reasonably place a stop.
Downtrend:
As a rule, confirmation of the trend is a correction to 0.5 (50.0%) or 0.618 (61.8%) Fibo.
How do Fibonacci levels work?
They work on the principle of a classic technical analysis tool - it works because they see everything. Consequently, traders stretch the grid according to the same principle, and most of them see the same picture. Also, the very principle of Fibonacci analysis comes down to the fact that everything in our world tends to the Golden Ratio of 0.618. Therefore, this instrument can be safely called natural.
Unfortunately, Fibonacci is not the Grail, but an auxiliary tool that will help you determine the range of price movement and strong support/resistance levels. It is ideal to use Fibonacci in conjunction with patterns; you also need to correctly identify trends and understand where the market is going.
Books you can read on this topic
In the book by A. Frost and R. Prechter “The Elliott Wave Principle” you can familiarize yourself with the basic principles of the Elliott wave theory in its classical form.
In the book “(Dis)obedient Markets” by B. Mendelbrot and R. Hudson, you can read about a modern view of the rhythms of financial markets and the fractal structure of price changes.
In the book by B. Williams “Trading Chaos” you can learn more about the method of counting waves, briefly outlined in this material.
R. Fisher's book “The Fibonacci Sequence: Applications and Strategies for Traders” provides another view on the use of Fibonacci levels in wave counting.
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